Arbitration provisions in contracts have become the norm for companies big and small over recent years. Businesses and individuals in Texas and across the country have come to realize some of the potential benefits that arbitration can offer as opposed to the court system, including an expedited resolution process, potential cost savings, and confidentiality. It is important, however, that the parties understand and explicitly lay out the scope of any arbitration provision that they intend to include in an agreement.
In order to compel arbitration, a party must establish the existence of a valid arbitration clause, and that the claims in dispute fall within that arbitration agreement’s scope. Once the existence of an arbitration agreement has been established, a presumption attaches in favor of hearing the dispute in arbitration. The burden then shifts to the opposing party to establish some ground for revocation of the arbitration agreement. The court resolves any doubt about the contested issues in favor of arbitration. The presumption of arbitrability is particularly applicable where the clause is broad, i.e., where the clause provides for arbitration of “any” dispute arising between the parties or “any” controversy or claim arising out of or relating to the contract at issue. If the facts alleged by the party seeking arbitration have a significant relationship or are factually related to the contract containing the arbitration agreement, the claim is arbitrable. However, if the facts alleged in support of the claim are completely independent of the contract, and the claim could be maintained without reference to the contract, the claim will not be subject to arbitration.
If a party attempts to arbitrate a dispute pursuant to an arbitration provision, the opposing party may still contest that party’s ability to do so. Both federal and Texas law provide for three circumstances which allow a party to contest the validity of an arbitration provision. First, a party may contest the contract that includes the arbitration provision as a whole. A party contesting the contract as a whole may do so either on a ground that directly affects the entire agreement, e.g., that the agreement was fraudulently induced, or on the ground that the contract contains an illegal provision which renders the whole contract invalid. A challenge to the contract as a whole will be considered by an arbitrator rather than a court. The resisting party may also challenge the validity of the agreement to arbitrate itself. An example of such a challenge would be that the agreement was obtained by fraud or is unconscionable. Challenges to the validity of the arbitration agreement will be decided by a court. Lastly, a party may resist arbitration by challenging the scope of the arbitration agreement, i.e., that the question to be resolved is not one which the parties agreed to arbitrate. A challenge to the scope of an arbitration agreement will likewise be decided by the trial court.
In the event that such a provision is upheld and the parties are forced to arbitrate the dispute, the resisting party has limited means by which it may vacate an adverse award. Under both the Texas General Arbitration Act and the Federal Arbitration Act, an arbitration award may be vacated: (1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators; (3) where the arbitrators refused to postpone the hearing upon sufficient cause shown, or refused to hear evidence material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers. The Texas General Arbitration Act further provides that an award may be vacated if “there was no agreement to arbitrate, the issue was not adversely determined in a proceeding under Subchapter B, and the party did not participate in the arbitration hearing without raising the objection.” Under both federal and state law, however, arbitrators are afforded very wide discretion. The burden of proof of a party contesting the arbitration provision is significantly high, and courts very seldom find sufficient facts to warrant vacatur.
In a world where arbitration provisions are becoming commonplace, it is essential that parties fully weigh the pros and cons of executing a contract that contains an arbitration provision. Because courts give extreme deference to any reference in a contract evidencing an intent to arbitrate, it is important that parties explicitly capture the scope of the types of disputes they intend to make arbitrable. While arbitration can offer many benefits, the parties must understand that the wide discretion of an arbitrator and limited ability to vacate the final award can lead a losing party to have buyer’s remorse.